5 Signs Your Organization Might Be Headed for an Ethics Scandal

Executive Summary

Corporations often approach ethics as an individual problem, designing oversight systems to identify the “bad apples” before they can turn the organization into a “rotten barrel.” But a review of the research on ethics, as well as interviews with 23 experts, instead points to organizational factors: a sense of urgency or fear; teams or units that are isolated, geographically or socially; high organizational complexity or fragmentation, allowing plausible deniability; a culture in which success begets impunity, and the use of in-group language.

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Corporations often approach ethics as an individual problem, designing oversight systems to identify the “bad apples” before they can turn the organization into a “rotten barrel.” But at places like Wells Fargo, FIFA, and Volkswagen, we can’t fully describe what happened by reading profiles of John Stumpf, Sepp Blatter, or Martin Winterkorn. Bad apple explanations also fail to explain the string of ethical crises at Uber, the long-term impunity of powerful men who sexually harass colleagues, or any of the other ethics scandals we’ve seen this year. Rather, we see a “tone at the top” underpinned by widespread willful blindness, toxic incentives, and mechanisms that deflect scrutiny. These conditions seem to persist and metastasize. They replicate despite changes in leadership and in management systems.

Groups are more than the sum of their parts; we know we act differently when we’re on a team (or in a mob). And our explanations for ethical scandals are incomplete without a focus on group dynamics.

Although corruption, fraud, and other integrity scandals differ enormously in cause and trajectory, they correlate with particular group conditions with remarkable consistency. My recent research study complemented a review of thediffuse literatureon this topic by asking 23 integrity experts to identify the behavior and norms they would expect to find in unethical companies. The experts all had experienced direct exposure to scandal-ridden organizations as investigators, regulatory monitors, or academics. Their answers fell into a clear pattern, identifying five traits of organizational culture that correlate with ethical scandals:

Urgency and fear: Following corruption scandals, leaders tend to describe events in terms of pressure, necessity, and what the company needed to do to ”survive.” This perception of existential competitive threats can be used to justify the creation and maintenance of toxic incentives, and it will undermine any efforts to raise concerns.

Isolation: Groups and teams that are far from headquarters—either in geography, access to information, or both—are vulnerable. When a team that is isolated (by accident or design) comes under the direction of an authoritarian, competitive leader, an enterprise has created the baseline conditions for corruption. People are far more influenced by their immediate surroundings than by a code of conduct set at the top.

Fragmentation and plausible deniability: When a corporate scandal occurs, it is common for leaders to deny personal knowledge. Sometimes these hollow-sounding explanations are literally true, if disingenuous. A leader does not need to personally sign off on a bribe payment to hold responsibility for how employees have been socialized into an organization and what behavior is sanctioned or rewarded. But organizational complexity, matrixed responsibility, and a lack of clarity as to roles can help feed and justify conditions in which each decision is judged in isolation, and no one is held broadly accountable.

Success and impunity: We have a tendency not to question success. When a team markedly outperforms its peers, it develops a mystique that serves to block scrutiny of the basis of that success. The reputations of other teams suffer as they appear to underachieve in comparison. If the high-achieving team’s success has been achieved by unethical means, a company has created a slippery slope by which conditions in one subculture spread to others.

In-group language: Humans need both to hide and rationalize unethical behavior, leading to the widespread use of in-group jokes and euphemisms. A rich terminology springs forth to describe bribes, from “gifts” and “commissions” to SNC Lavalin’s “project consultancy costs,” TSKJ’s “cultural arrangements,” and the funds Enron put aside to “educate Indians.” Metaphors of war and sport, common in this context, help to shift the frame away from that of individual choice.

When one (or more) of these conditions is present, a team is susceptible to ethical violations. Although leaders often complain that company culture is hard to measure, it is far easier to seek employees’ input on team culture and norms than to ask them to report fraudulent practices or call out powerful wrongdoers. Employee surveys, conversations, and focus groups can help us understand what actually happens in organizations, how seriously stated values and formal processes are taken, and which units or departments may pose the most ethical risk.

Leo Tolstoy wrote that “All happy families are alike; each unhappy family is unhappy in its own way.” When it comes to organizational ethics, the opposite is true. Unethical cultures have similarities, but what we need to describe is an absence. There will be a lack of perspective taking, an unthinking, reactive way of dealing with time and pressure, no alternative narrative to growth at all costs. By contrast, ethical cultures are not all the same, and they are much harder to maintain than to destroy. But if we would like to keep our apples fresh, we need to consider both the tree and the orchard. The rot doesn’t just appear by itself.

Alison Taylor is a Managing Director at BSR and an Adjunct Professor at Fordham Law School and the Gabelli School of Business. She focuses on approaches to sustainability through risk management, strategy, stakeholder engagement, transparency, ethics, and organizational change.